Ligos v. Isramco, Inc., C.A. No. 2020-0435-SG (Del. Ch. Aug. 31, 2021)

Under MFW, a conflicted controller transaction may get the benefit of business judgment review when conditioned on two procedural protections involving: (i) approval by an independent special committee; and (ii) approval by a fully informed, uncoerced majority of the minority stockholders. At issue in Ligos was whether the shareholders were fully informed regarding the value of an arbitration concerning certain royalties when they approved a merger.

Here, the board of director’s authorized the company’s president, who was its indirect majority holder and affiliated with the acquirer, to engage in the arbitration with another related party. But the shareholders were not informed of this development. At the motion to dismiss stage, the court found this omission material. It could be inferred that the president, standing on both sides of the transaction, acted for his own benefit to prolong the arbitration to artificially reduce the company’s value. Because this would impact the company’s valuation for purposes of evaluating the proposed merger, the board authorizing the controller to participate, and his actual participation, would have been material information to the shareholders’ decision to approve the proposed merger. Accordingly, the court found that the complaint could not be dismissed under MFW, while leaving certain other pleading stage determinations for another day.